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IGO’s record lithium-derived payout cushions impact of nickel asset writedowns

In the wake of significant writedowns on the value of its nickel assets acquired through the expensive Western Areas takeover, IGO (ASX:IGO) is poised to alleviate any distress for its shareholders. The company is set to deliver a remarkable final payout, including a bonus payment derived from its successful lithium ventures.

IGO’s pivot to lithium is evident in its exceptional returns from the sector, as it transforms into a lithium-focused player with a nickel component. This shift marks a stark reversal from a year ago, when the acquisition of Western Areas, a rival nickel group, for $1.3 billion proved to be a costly misstep, offset only by the thriving lithium endeavors.

Having already raised interim dividends this year from 5 cents to 14 cents per share, the Perth-based miner revealed plans for a fully franked final dividend of 44 cents per share. Additionally, it will provide a “special dividend” of 16 cents, aligning with IGO’s robust Capital Management Policy to showcase its financial strength.

Collectively, this amounts to a full-year payout of 74 cents per share, a substantial increase from the pre-lithium boom figure of 10 cents per share in 2021-22.

The remarkable surge in shareholder returns can be attributed to the strong production and profits stemming from the Greenbushes lithium mine in Western Australia’s southwest. This success persists despite ongoing challenges with the lithium hydroxide refinery and a $968 million impairment charge tied to the Forrestania and Cosmos assets acquired through the Western Areas takeover. This impairment has prompted an independent review of the Cosmos Project.

The bolstered dividends are poised to alleviate concerns over the loss and impairment of nickel assets and the apparent overspending on the Western Areas deal.

IGO’s newfound identity as a major lithium player is evident in its fiscal results: annual revenue of $1.024 billion, net profit after tax of $549 million, and a record underlying EBITDA of $1.987 billion. The EBITDA figure surpassing revenue results from the structure at the Tianqi Lithium Energy Australian Limited (TLEA) joint venture. This arrangement provided IGO with a share of net profit amounting to $1.604 billion and dividends totaling $1.184 billion, enabling the substantial final and special dividends.

While Greenbushes’ annual spodumene production of 1.491 million tonnes exceeded expectations, costs of goods sold slightly surpassed the upper limit of guidance at $279 per tonne.

However, IGO’s lithium foray has not been without challenges. The troubled Kwinana hydroxide refinery continues to experience difficulties, with IGO acknowledging its anticipated improvement in operational performance for 2023-24.

Despite its diminished prominence after significant writedowns, IGO’s nickel business remains operative. The company reported group nickel production of 34,846 tonnes and cash costs of $5.63 per payable pound of nickel, in line with revised guidance. Notably, IGO mentioned the nickel business more extensively than its booming lithium ventures in its report.

Operating assets Nova and Forrestania generated aggregate free cash flow of $587 million for the year, boasting an EBITDA margin of 56%. Nevertheless, IGO acknowledged a $968 million non-cash impairment linked to assets acquired from Western Areas, highlighting its commitment to optimising value from these assets while pursuing nickel business growth.

Despite challenges, IGO expressed determination to create shareholder value in the coming fiscal year through the expansion of Greenbushes, enhanced lithium hydroxide production at Kwinana, and the realisation of value from the Cosmos Project. The company aims to maintain secure and dependable production and costs within guidelines at Greenbushes, Nova, and Forrestania.

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